Negotiations between Nigeria and Saudi oil giant Aramco over a proposed $5 billion oil-backed loan — expected to be the largest in Nigeria’s history — have slowed significantly, as falling global oil prices and concerns over Nigeria’s crude supply capacity make lenders increasingly hesitant to commit.

The deal, initially advanced by President Bola Tinubu during a meeting with Saudi Crown Prince Mohammed bin Salman at the Saudi-Africa Summit in Riyadh in November 2023, was designed to secure much-needed foreign exchange for the Nigerian economy. If concluded, it would mark Aramco’s first major financing venture in Nigeria, and represent the deepest oil-for-cash deal the country has ever sought.

However, sources familiar with the talks told Reuters that the drop in global crude prices has triggered renewed skepticism among banks that were expected to participate in financing the facility.

“The facility would be Nigeria’s largest oil-backed loan to date and Saudi Arabia’s first participation of this scale in the country, although the decline in oil price could shrink the size of the deal,” a source said.

The problem lies in the mechanics of oil-backed loans: when oil prices fall, the borrower must commit a higher volume of crude to repay the same amount of money. For Nigeria, a country already devoting over 300,000 barrels per day (bpd) to servicing prior oil-for-cash deals, this creates a significant strain on available crude for new obligations. One of the existing loans is reportedly due for repayment this month, further limiting headroom.

Experts say the Aramco deal has become complicated by these variables, raising fears of over-leveraging Nigeria’s already-stretched oil commitments.

Supply Constraints As A Major Risk

Nigeria’s crude output has been persistently hampered by years of underinvestment, oil theft, pipeline vandalism, and disruptions in the Niger Delta. These structural issues have undermined confidence in the country’s ability to guarantee stable long-term crude deliveries — a key requirement for any oil-backed facility.

The Nigerian National Petroleum Company Limited (NNPC) also faces pressure to allocate crude to joint venture partners like Shell, Seplat, and Oando to cover production costs. This limits how much oil the state can freely allocate for financing purposes. In the proposed Aramco deal, Oando is expected to handle the offtake of the physical cargoes, further complicating the logistics.

With oil prices falling below expectations — currently hovering around $75 per barrel, well below the $85–$90 range seen earlier in the year — the economics of the loan have weakened. For banks, lower oil prices raise the risk that Nigeria may default on the agreed repayment schedule, especially if production fails to ramp up.

The Aramco loan had also been viewed as a potential gateway for Saudi Arabia to expand its financial and strategic footprint in Africa’s biggest oil producer. Many hoped that such a deal would spur broader investment cooperation, possibly involving downstream assets and refinery partnerships.

But the current deadlock may push both sides to reconsider terms. Analysts believe that if a consensus can be reached, perhaps through renegotiated volume commitments or partial guarantees, it could unlock a new template for future resource-backed lending in Nigeria.

Nigeria’s Track Record and the Afreximbank Deal

This isn’t Nigeria’s first foray into oil-backed borrowing. In April 2024, the country received the final $1.05 billion tranche of a $3.3 billion facility secured from the African Export-Import Bank (Afreximbank). That deal, structured similarly to the Aramco one, is being repaid with 90,000 barrels per day of crude, priced at a fixed $65 per barrel.

While that arrangement helped boost dollar liquidity and stabilize the naira in the short term, it also locked Nigeria into long-term delivery obligations — a model some critics warn is unsustainable without significant output growth or price recovery.

President Tinubu’s administration has defended the practice as necessary for stabilizing the foreign exchange market and rebuilding reserves. But falling oil prices now threaten the logic behind such loans.

The delays in reaching an agreement with Aramco come at a time when Nigeria is banking heavily on oil-backed loans to bridge fiscal and external imbalances. The country’s foreign reserves have been under pressure, and the naira has experienced prolonged volatility amid dollar shortages and speculative trading.

If the $5 billion loan fails to materialize, it may force the government to look elsewhere — possibly revisiting bilateral talks with China or turning again to Afreximbank — although few partners offer the scale and strategic potential of a deal with Saudi Arabia’s oil giant.

As talks drag on, it is believed that finding consensus on the Aramco deal could pave the way for resolving broader issues around Nigeria’s use of oil-for-loan arrangements. But that will depend on whether the two sides can overcome current market risks and rebuild lender confidence in Nigeria’s oil supply capabilities.